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Israel cabinet OKs wealth fund to prevent "Dutch Disease"
April 14, 2013 / 3:51 PM / 5 years ago

Israel cabinet OKs wealth fund to prevent "Dutch Disease"

JERUSALEM (Reuters) - Israel’s cabinet on Sunday re-approved the establishment of a sovereign wealth fund to prevent a steep appreciation of the shekel once natural gas fields start to generate high levels of income.

Bank of Israel Governor Stanley Fischer (R) speaks during a news conference in Jerusalem April 2, 2013. REUTERS/Ronen Zvulun

Bank of Israel Governor Stanley Fischer has called for a sovereign wealth fund similar to Norway’s to safeguard the billions of dollars in windfall natural gas revenue.

Israel wants to avoid the so-called Dutch Disease, whereby a sudden explosion in national wealth overheats the currency and undermines export industries.

The plan had initially been approved by the last government but it failed to make it to a parliamentary vote prior to a general election in January.

Eugene Kandel, head of the National Economic Council - which assists the Prime Minister on economic issues - said he hoped the wealth fund bill will be quickly passed by parliament.

The Bank of Israel-managed fund, he said, should start operating in 2016 or 2017 and invest outside of Israel.

Production of natural gas began in late March at the Tamar field, which has reserves of some 10 trillion cubic feet. The nearby and much larger Leviathan field is set to come online as early as 2016. Both sites are expected to export natural gas.

The start to natural gas output was a factor in pushing the shekel to a new 17-month high against the dollar last week, prompting concern from exporters and leading to central bank intervention in the foreign exchange market to contain the shekel.

Flows to the fund will come from a progressive tax of as much as 60 percent on natural gas revenue and only after the exploration firms recoup a large part of their investment.

Other natural gas income, such as royalties and corporate taxes, will stay in Israel and boost government coffers.

Under the bill, the only way the government can have access to the fund’s principal in the event of an emergency is with the approval by at least 65 of the 120 lawmakers in parliament.

Reporting by Steven Scheer

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